On June 28, the U.S. Supreme Court declined to hear an appeal in a case, Standing Akimbo, LLC et. al. v. United States. Standing Akimbo, LLC (Standing Akimbo) is a state-legal cannabis dispensary, operating under the laws of Colorado.
Though the Supreme Court did not hear the case and, therefore, set no legal precedent, the statement of Justice Clarence Thomas accompanying the Supreme Court’s denial contains interesting insight into Justice Thomas’ views on prohibition of cannabis at the federal level.
At issue were claimed business deductions for Standing Akimbo’s ordinary and necessary business expenses. The Internal Revenue Service (IRS) sought information from Standing Akimbo and its partners by conducting a civil audit investigating whether four partners in Standing Akimbo had taken improper deductions for business expenses arising from a “trade or business” that “consists of trafficking in controlled substances” 26 U.S.C. §280E.
Fearing criminal prosecution, the taxpayers declined to provide the IRS audit information, and the IRS sought to obtain information from the Colorado Department of Revenue’s Marijuana Enforcement Division (MED) by issuing summonses to MED for plant reports, gross sales reports and license information. The taxpayers filed a petition to quash the summonses in Colorado federal district court. The Colorado district court dismissed the taxpayers’ petition and ordered the summonses enforced. The U.S. Court of Appeals for the Tenth Circuit affirmed, holding that the district court properly entered judgment in favor of the IRS.
Under Section 280E of the Internal Revenue Code, so-called “unlawful drug traffickers,” as determined by the IRS, are disallowed from excluding their actual expenses of conducting business from sales revenue to determine their taxable income. In its petition requesting that the Supreme Court hear its case, Standing Akimbo stated that this has the practical effect of taxing approximately $1.20 for every dollar of net income, even after allowance for cost of goods sold.
Tracing interesting parallels to early American history with maybe a pinch of hyperbole, Standing Akimbo wrote in its petition to the Supreme Court: “This matter is similar to the matter giving birth to the American Revolution. Two hundred and sixty years ago, the British declared Dutch tea as contraband under the Navigation Acts. The Colonies refused to follow suit and kept Dutch tea legal and allowed the tea trafficking. Dutch tea, being contraband, was taxed at a different and much higher rate than the Indian tea imported by the British East India Company to the Colonies…Two hundred sixty years later, the issue is back. Except here, the contraband is cannabis.”
In a decisive tone, Justice Thomas expressed doubt about the current state of Congress’ power to prohibit the local cultivation and use of cannabis, noting that 36 states currently allow medicinal cannabis use, and 18 of those states also allow recreational use. Citing a 2005 Supreme Court ruling, Gonzalez v. Raich, 5454 U.S. 1, 5 (2005) which held that Congressional power over interstate commerce authorized the prohibition on cultivation and use of cannabis, Justice Thomas wrote:
“Whatever the merits of Raich when it was decided, federal policies of the past 16 years have greatly undermined its reasoning. Once comprehensive, the Federal Governments current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana. This contradictory and unstable state of affairs strains basic principles of federalism and conceals traps for the unwary.”
After listing some of what Justice Thomas considers traps from the unwary (such as the interplay between federal drug trafficking and firearms laws and noting that he could provide many examples), Justice Thomas further wrote:
“Suffice it to say, the Federal Government’s current approach to marijuana bears little resemblance to the watertight nationwide prohibition that a closely divided Court found necessary to justify the Government’s blanket prohibition in Raich. If the Government is now content to allow States to act “as laboratories” “ ‘and try novel social and economic experiments,’ “ Raich, 545 U.S., at 42 (O’Connor, J., dissenting), then it might no longer have authority to intrude on “[t]he States’ core police powers…to define criminal law and to protect the health, safety, and welfare of their citizens.” A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.”
The Supreme Court is asked to hear more than 7,000 cases each year and agrees to hear only about 100-150 of those cases. While the Supreme Court’s recent denial to hear the case does not change any laws or set any legal precedent, Justice Thomas chose to expound beyond the Supreme Court’s standard one-sentence statement when it declines to hear a case that “the petition for a writ of certiorari is denied.”
The willingness of a Supreme Court Justice to make a decisive suggestion that a prohibition on intrastate use or cultivation of cannabis may not be necessary or proper shows a dramatic shift in opinion of cannabis coming from a member of the Supreme Court bench, and may be a bellwether for the direction of federal cannabis policy in the future.
Glenn C. Ross is the Co-leader of Plunkett Cooney's Business Transactions & Planning Practice Group. He represents clients in the areas of business law and transactions involving real estate and complex financing. Mr. Ross also ...
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